Question

Instructions 

The following transactions were completed by Irvine Company during the current fiscal year ended December 31: 

Feb. 8 Received 40% of the $ 17,000 balance owed by DeCoy Co., a bankrupt business, and wrote off the remainder as uncollectible.

May 27 Reinstated the account of Seth Nelsen, which had been written off in the preceding year as uncollectible. Journalized the receipt of $ 7,405 cash in full payment of Seth's account.

Aug. 13 Wrote off the $ 6,460 balance owed by Kat Tracks Co., which has no assets.

Oct. 31 Reinstated the account of Craw ford Co., which had been written off in the preceding year as uncollectible. Journalized the receipt of $ 3,940 cash in full payment of the account.

Dec. 31 Wrote off the following accounts as uncollectible (compound entry): Newbauer Co., $ 7,095;

Bonneville Co., $ 5,540; Crow Distributors, $ 9,495 ; Fiber Optics, $ 1,035 .

Dec. 31 Based on an analysis of the $ 1,782,000 of accounts receivable, it was estimated that $ 35,640 will be uncollectible. Journalized the adjusting entry.

 1. Record the January 1 credit balance of $25,615 in a T-account for Allowance for Doubtful Accounts.

 2. A. Journalize the transactions. Refer to the Chart of Accounts for exact wording of account titles. B. Post each entry that affects the following selected T-accounts and determine the new balances: Allowance for Doubtful Accounts and Bad Debt Expense.

 3. Determine the expected net realizable value of the accounts receivable as of December 31 (after all of the adjustments and the adjusting entry)

 4. Assuming that instead of basing the provision for uncollectible accounts on an analysis of receivables, the adjusting entry on December 31 had been based on an estimated expense of 1 of 1% of the net sales of $17,760,000 for the year, determine the following: 

A. Bad debt expense for the year. 

B. Balance in the allowance account after the adjustment of December 31. 

C. Expected net realizable value of the accounts receivable as of December 31.

Answer 1

2 A) Journal Entries to be posted in the books of Irvine Company

Feb 8-: Bank A/c Dr. $6,800 ($17,000 X 40%)

   Allowance for doubtful account A/c Dr. $10,200

   To Accounts receivable $17,000

May 27-: Bank A/c Dr. $7,405

   To Allowance for doubtful account $7,405

Aug 13-: Allowance for doubtful account A/c Dr. $6,460

To Accounts receivable (Kat Tracks Co.) $6,460

Oct 31-: Bank A/c Dr. $3,940

To Allowance for doubtful account $3,940

Dec 31-: Allowance for doubtful account A/c Dr. $23,165

To Accounts receivable ($7,095+$5,540+$9,495+$1,035) $23,165

Dec 31-: Bad debt expense (PnL) $38,505 ($35,640+$2,865)

To Allowance for doubtful account (BS) $38,505

2B) Bad debt expense = $10,200 - $7,405 + $ 6,460 - $3,940 + $ 23,165 = $39,825

Provision for doubtful debt = $35,640

3) Expected net realizable value of the accounts receivable as at December 31 -: $ 1,782,000 - $ 35,640 = $1,746,360

4 A) Bad debt expense for the year = $ 39,825 ( Actual bad debt will be same irrespective of the method for creation for bad debt)

Provision for doubtful debt to carry at balance sheet = (1/4 X 1% X $ 17,760,000) = $ 4,440,000

Journal for recording of provision on the estimate of 0.25% on Net Sales

Provision for doubtful debt (PnL) $4,414,385 ($4,414,385-$25,615)

To Provision for doubtful debt (BS) $4,414,385

4) Expected net realizable value of the accounts receivable as at December 31 -: $ 1,782,000 - $ 1,782,000 = Nil

If the Company creates 0.25% on Net sales of $17,760,000, it will amount to excess provisioning for closing accounts receivable on $ 1,782,000.